April 27, 2011

It has to be about contract formation. And not about violating public policy.

That’s what Associate Justice Clarence Thomas writes are the limits on using Federal Arbitration Act Section 2 to strike down arbitration contracts under state law.

“Contract defenses unrelated to the making of the agreement—such as public policy--could not be the basis for declining to enforce an arbitration clause,” writes Thomas in his six-page concurrence in concurrence in AT&T Mobility v. Concepcion(decided this morning by the U.S. Supreme Court; full details here).

The Thomas concurrence focuses on the textual limits of FAA Section 2’s saving clause. The clause allows states to make laws on contracts, and even laws dealing with arbitration, but they can’t discriminate against arbitration.

Thomas agrees with the Court’s result, but not how it got there. “As I would read it,” Thomas writes, “the FAA requires that an agreement to arbitrate be enforced unless a party successfully challenges the formation of the arbitration agreement, such as by proving fraud or duress. 9 U. S. C. §§2, 4. Under this reading, I would reverse the Court of Appeals because a district court cannot follow both the FAA and the Discover Bank rule, which does not relate to defects in the making of an agreement.”

But he states that a focus on Section 2 “could benefit from briefing and argument in an appropriate case.” He notes that he believes the Court’s test would provide the same result as his textual interpretation.

Thomas parses the saving clause, and says it suggests that the exception to FAA enforcement does not “include all defenses applicable to any contract[,] but rather some subset of those defenses.”

By examining the rest of the FAA (9 U.S.C. Sec. 1, et seq.), Thomas concludes that the defenses must go to the contract's formation.

Which, he concludes, Discover Bank"s unconscionability analysis does not. The case, he writes “does not concern the making of the arbitration agreement.”

The Ninth Circuit, notes Thomas, had found the arbitration agreement an exculpatory contract—one that would absolve AT&T Mobility of liability. Those contracts “are a paradigmatic example of contracts that will not be enforced because of public policy.”

And, the “[r]efusal to enforce a contract for public-policy reasons does not concern whether the contract was properly made.”